Those prioritising the protection of their outward investments in foreign energy sectors, as well as developing countries, whose objective is to attract foreign capital to their energy markets, both would benefit from a stable multilateral legal framework establishing a level playing field and offering enforceable common rules of investment protection, while at the same time preserving state sovereignty over natural resources.
The economies of energy poor Sub-Saharan countries could grow by 30%, if policymakers and international organisations succeed in creating a favourable market environment on the national, as well as regional level. This is the factor that would condition the inflow of investments, worth some $450 billion, required for the electricity sector in the region. In this context, the Energy Charter Treaty (ECT) could be instrumental in providing market stability and security necessary for foreign investors to enter the African market.
Turning to such countries as China, the ECT can offer strong mechanisms for protecting Chinese investments in foreign energy markets, and be a complementary tool for the implementation of the One Belt One Road initiative (which involves 65 countries and major investments in energy infrastructure projects across this new Silk Road).
To this end, the ECT is a unique legal instrument focusing specifically on investments in the energy sector, which has the capacity to protect investors against political volatility and increase their security in the view of transforming regulatory landscapes.
In order to illustrate the multiple advantages of the ECT as a multilateral legal framework, this publication offers the insights of experienced legal practitioners and investment experts into the question of the ECT’s role in reducing and compensating regulatory and political risks.
ECT – a useful working instrument for reducing and compensating regulatory and political risks for international energy investments
By Lucia Raimanova and Jeffrey Sullivan
Lucia Raimanova is a Senior Associate at Allen & Overy LLP, London.
Jeffrey Sulivan is a Partner at Allen & Overy LLP, London.
The ECT was designed to reflect the fact that energy investments tend to involve high-value and long-term financial commitments in projects that cannot adapt their cost and financing structures to short-term changes in investment conditions. Energy investments are, therefore, particularly sensitive to regulatory and policy changes and other associated risks.
When these risks are not satisfactorily covered off by national laws or an investment contract (and they often are not), resort to international law is paramount. While bilateral investment treaties (BITs) offer many of the same substantive protections contained in the ECT, BITs are not designed with energy specifically in mind and they rarely impose an express obligation on States to create stable, predictable and transparent conditions for investment. In fact, some BITs specifically preserve a State's power to regulate. For example, the 2012 US-Model BIT provides in Article 12(5) that "[n]othing in this Treaty shall be construed to prevent a Party from adopting, maintaining, or enforcing any measure otherwise consistent with this Treaty that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concern". As a result, tribunals called upon to decide disputes under these instruments may give significant latitude to State's regulatory powers, exposing the investor to wide-ranging regulatory and political risks particularly in the absence of an adequate stabilisation clause contained in an investment contract with the State in question.
The ECT, on the other hand, is a multi-lateral treaty specifically tailored to energy investments. One of the original goals of the 1991 European Energy Charter was to enhance energy security and to facilitate investment and co-operation in the energy sector in Europe after the dissolution of the Soviet Union. By providing Contracting States and their investors certain standards of protection and mechanisms to resolve disputes relating to investments in the energy sector, the ECT sought to create more predictable legal frameworks that would foster the large international investments that are required in the energy sector. The ECT's fundamental objective is thus to facilitate transactions and investments in the energy sector by reducing political and regulatory risks. The ECT seeks to accomplish this objective, in particular, by requiring the Contracting States to maintain a stable, predictable and transparent legal and regulatory framework for such investments, as enshrined in Article 10(1) of the ECT. By doing so, the ECT can be said to offer a more robust level of protection than most BITs.
That the ECT seeks to provide for such a heightened level of protection is further apparent from the fact that the latitude of regulatory action afforded to the States under the ECT is limited. The Contracting Parties included just a few exceptions to the ECT’s robust investment protections. Even those exceptions that were included to preserve a State’s regulatory freedom are hedged with qualifications. For example, the exceptions contained in Article 24 do not apply to provisions on expropriation or compensation for losses. One of the key exceptions designed to preserve regulatory space (i.e. regulatory measures necessary to protect human, animal or plant life or health) does not apply to any of the substantive investment protections at all. Further, the exceptions contained in Article 24(3) of the ECT are limited to measures necessary for the protection of essential security interests, nuclear proliferation and maintenance of public order as long as they do not constitute a disguised restriction on transit – all highly specific and relatively unusual circumstances. In general, the intended scope for a host State's regulatory freedom is thus much narrower under the ECT than under BITs.
To date, only a few international tribunals have handed down awards interpreting the specific reference to a stable, predictable and transparent legal and regulatory framework in Article 10(1) of the ECT. The tribunal in Petrobart Limited v. Kyrgyz Republic (ARB No. 126/2003) in its Award of 29 March 2005 has specifically acknowledged the obligation of the Contracting Parties to provide stable, equitable, favourable and transparent conditions and found that the Kyrgyz Republic failed to provide such conditions to Petrobart's investment by the manner in which it went about restructuring the system for supply of oil and gas in the Kyrgyz Republic. The Tribunal acknowledged that there may have been good reasons for the restructuring, but observed that the Kyrgyz Republic was under an obligation to carry out the restructuring in a way which showed due respect for investors such as Petrobart. Other decisions did not give sufficient prominence to the distinctive object and purpose of the ECT (despite that the Vienna Convention on the Law of Treaties 1969 mandates that the ECT be interpreted in good faith in accordance with the ordinary meaning of the terms of the treaty in their context and in the light of its object and purpose). For example, the tribunal in Mohammad Ammar Al-Bhloul v. Republic of Tajikistan (SCC Case No. V064/2008) in its Partial Award on Jurisdiction and Liability of 2 September 2009 has relied on various non-ECT case law and concluded that the requirement simply meant that a host State is obliged to act "in an open matter and consistent with commitments it has undertaken".
While the Al-Bahloul tribunal may be correct that the ECT does not require States to freeze their legal frameworks, the tribunal failed to give meaning to Article 10(1) and its requirement to create a stable legal framework for energy investments.
While the ECT does not require states to freeze their laws indefinitely, at a minimum, the ECT imposes on obligation on States not to change their regulatory frameworks such that it materially affects the economics of long-term energy investments. To do so would breach Article 10(1) and would be inconsistent with the object and purpose of the ECT.
The ECT cases in Central Asia mentioned above lead us to the question of the Treaty’s relevance for China in the context of its external investment policy and the One Belt One Road (OBOR) initiative.
The importance of energy cooperation between China and the countries in Central Asia is well known, as well as the amount of Chinese investments in energy infrastructure in the region.  However, according to the energy investment experts, the BITs and ISDS that are currently in place between China and Central Asian countries (i.e. Kazakhstan; Turkmenistan; Uzbekistan; Kirgizstan; Tajikistan) are in most cases limited to determining the amount of compensation in case of expropriation. At the same time, considering the proportion of China’s inward and outward foreign direct investments (20 and 100 billion, respectively), experts point to the fact that China is more likely to be represented on the investors’ side in investment arbitration rather than as a respondent.
In that respect, the ECT can be regarded as a broader legal basis for investment protection between Chinese investors and the 54 Contracting Parties, including many countries in the OBOR region and Central Asia.
At the International Energy Charter Conference (The Hague, 20-21 May) Maria van der Hoeven, IEA Executive Director, stated: “if the Energy Charter aspires to expand its membership to parts of Africa and Asia, there is a potential role [for the ECT] to play in creating a more attractive environment for investment [in the countries].” Ms van der Hoeven continued as follows: “In providing a level of protection to foreign investors, the Treaty can help to mitigate some of key political and regulatory uncertainties. When a country chooses to work with the ECT, it sends a signal about its level of commitment to an open and predictable investment climate.”
In fact, a number of African countries are moving towards accession to the ECT already, while the political declaration of the International Energy Charter was adopted by Benin, Burundi, Chad, Niger, Tanzania and Uganda.
Morocco, Mauritania, Burundi, Yemen and Niger are currently preparing Energy Charter Accession Reports, and Burundi has recently taken the first step towards accession to the Energy Charter Treaty.  Notably, the Economic Community Of West African States (ECOWAS) have adopted the IEC, as well as an Energy Protocol, which mirrors the ECT.
The investment challenge that Sub-Saharan countries are facing is well-known. According to McKinsey, sub-Saharan Africa will consume nearly 1,600 terawatt hours by 2040, that is, four times more compared to 2010.  Putting this in perspective, this is as much electricity as India and Latin America combined consumed in 2010.  Although there is immense potential power generation capacity across the region (approximately 1.2 terawatts of power capacity from a range of different technology options, not including solar), some $490 billion of capital is required for building new generating capacity, and another $345 billion for transmission and distribution networks. 
The message from the banking sector is clear: “nations in Sub-Saharan Africa need to bolster their efforts to create more conducive climates for investment from Independent Power Producers (IPPs) if they are to remedy their severe shortfall in power generating capacity” 
To this end, the ECT can be instrumental in stabilizing and securing the investment climate and therefore attracting private investments in the region, not only in the power sector, but also for hydrocarbons.
The latest paper published by the Oxford Institute for Energy discusses the series of oil discoveries in Uganda - the largest onshore oil finds in sub-Saharan Africa in over two decades – and concludes that one of the key reason behind the delay in oil production (oil exports from Uganda are expected not earlier than in 2020) is regulatory and political volatility. 
Although lower international oil prices are expected to “sap the last of Uganda’s regulatory bravado”,  these developments could be considered a good case study in the region, demonstrating the need for a more stable and secure investment climate.
Looking back at diverse energy challenges faced by the countries from Asia to Africa, the issue of securing energy investments clearly comes about as the common denominator. Hence, the potential for ECT’s role as a multilateral framework for energy investments. The ongoing modernization of the ECT - which happens against the backdrop of the International Energy Charter adoption and coincides with global energy market rebalancing – opens a new chapter in the Treaty’s development and gives opportunity to the current ECT constituency, as well as observers, to translate some of their interests into an international legal framework that is unique in the field of energy.
2. For instance, see the article ‘China and the Emerging Global Energy Governance Architecture’ Europeanenergyreview.eu Noriko Yodogawa & Alexander Peterson “An Opportunity for Progress: China, Central Asia, and the Energy Charter Treaty", the Texas Journal of Oil, Gas, and Energy Law (Volume 8, Number 1 (2012-2013)
4. McKinsey Report “Brighter Africa: The growth potential of the sub-Saharan electricity sector” p.2
6. Ibid., pp. 3-4
The Energy Charter Secretariat monitors the implementation of the 1994 Energy Charter Treaty and provides support to the Treaty-based international organisation, the Energy Charter Conference (52 states and the EU and EURATOM). The Treaty strengthens the rule of law on energy issues, by creating a level playing field of rules to be observed by all participating governments, thereby mitigating risks associated with energy-related investment and trade. The Treaty focuses on: the protection of foreign investments; non-discriminatory conditions for energy trade; reliable energy transit; the resolution of state-to-state and, in the case of investments, investor-state disputes; and energy efficiency policies.
The International Energy Charter is a political declaration to be adopted in The Hague on 20 May 2015. It is designed to spread fundamental principles of international energy cooperation to new partner countries.
This series of materials is part of a wider awareness-raising campaign aimed at promoting the renewed role and creating further momentum behind the Energy Charter in today’s global energy markets.
Image: Electricity Transmission in Kenya. Christopher T Cooper CC-BY licence